Market Overview

Gilead Falls On Disappointing Hep C Drug Data; Analysts Remain Bullish


Back on February 3, I wrote an article about an exciting development in Gilead Sciences (NASDAQ: GILD) hepatitis C pipeline. A drug formerly called PSI-7977 (now known as GS-7977), which Gilead had acquired as part of an $11 billion buyout of Pharmasset, was showing very promising results in patients with genotype 1 hepatitis C. Previously, the drug has shown to be an effective treatment for hepatitis C genotypes 2 and 3.

At the time, Gilead's chief scientific officer, Norbert Bischofberger, said that patients with the disease had no detectable signs of the virus after four weeks on the drug. Analysts at J.P. Morgan (NYSE: JPM) called the data "simply striking" and doubled their 2015 and 2016 earnings forecasts for the drug. In the wake of the announcement from the company, Gilead shares rose more than 10%.

The GS-7977 data is part of an ongoing clinical trial known as ELECTRON. On Friday, Gilead announced a major setback for GS-7977 as the company announced that six out of eight genotype 1 patients ("null" responders) who were enrolled in ELECTRON and treated with a combination of GS-7977 and a drug called ribavirin have experienced a viral relapse within four weeks of stopping the 12 week treatment regimen. Two of the patients have not relapsed, although they have only reached the two week post-treatment time point.

“These data answer an important question about the use of GS-7977 and ribavirin for the treatment of genotype 1 null responder patients, suggesting that additional direct acting antivirals may be necessary to effectively treat this patient population,” said Norbert Bischofberger, PhD, Executive Vice President of Research and Development and Chief Scientific Officer. “We will continue to explore a number of therapeutic approaches to address this significant unmet medical need, including combinations with other oral antivirals.”

In light of this new information, GILD shares have lost around 15% on Friday as traders and investors recalibrate their expectations for GS-7977. Analysts are largely downplaying the significance of this news and are taking an optimistic outlook. Citigroup (NYSE: C) points out that despite the setback, GILD is still in the best position to develop an effective treatment for genotype 1 hep C, likely by combining GS-7977 with a NS5A inhibitor and/or extending the treatment duration. The analysts note that the only companies with a nuc/NS5A are Gilead and Bristol Myers Squibb (NYSE: BMY) and they believe that GILD is better positioned.

J.P. Morgan analysts are also reiterating their positive view of GS-7977 despite today's disappointment. They wrote, "overall, we believe the potential of ‘7977 and the overall HCV opportunity is largely intact, and we believe Gilead has multiple strategies it could pursue to address nulls in the future. As such, we reiterate our Overweight rating."

Analysts are also advising investors not to read too much into the high viral relapse rate of the "null" responders as it relates to the larger genotype 1 "naive" patient population. An ongoing clinical trial known as QUANTUM is taking place to test the '7977 combo treatment on a naive patient population. This data is expected to be released near the end of the first quarter, and a cure rate above 80% should move the drug into phase III testing in late 2012.

The ELECTRON clinical trial update from Gilead is being interpreted as good news for the company's competitors who are also developing hep C drugs. Shares of small-cap biotech firm Achillion Pharmaceuticals (NASDAQ: ACHN) have soared 23% to $10.76 while Idenix Pharmaceuticals (NASDAQ: IDIX) is up 5.32% to $12.07. Other movers include Vertex Pharmaceuticals (NASDAQ: VRTX) and Bristol Myers Squibb (NYSE: BMY), which are up 6.44% and 2.68%, respectively.

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